J.C. Penney Co. Inc. has closed on a five-year $2.35 billion credit facility that it said provides better pricing terms and later maturities than its predecessor.
The new facility consists of a $1.85 billion revolving line of credit and a $500 million term loan. It replaces a $1.85 billion credit facility scheduled to mature in April 2016.
Funds from the term loan will be used to pay down the cash borrowings of the previous facility, and the revolving line of credit will be available for working capital and general corporate purposes, Penney’s said.
“We proactively pursued this new facility to extend the maturity several years and further enhance our liquidity position, particularly during periods of peak working capacity needs,” said Ed Record, who was appointed executive vice president and chief financial officer of Plano, Tex.-based Penney’s in February. He noted “the improved price terms of this facility as well as the support and confidence from our banking partners.”
Investors, already well aware of plans for the new financing, sent shares of Penney’s down 3.4 percent to $8.69 in New York Stock Exchange trading Monday. The S&P 500 Retailing Industry Group was up 0.3 percent to 890.72.
The arrangement of the facility was co-led by Wells Fargo, Bank of America Merrill Lynch, J.P. Morgan, Barclays and Goldman Sachs.
Earlier this month, Moody’s Investors Service rated the revolver at “B1” and the term loan at “B2,” indicating the instruments were speculative in nature and subject to high credit risk. Moody’s expects low- to midsingle-digit sales growth for Penney’s this year and a continuation of operating losses for the next year to 18 months, but at “significantly” lower levels than in the recent past. In the first quarter, Penney’s trimmed its operating loss to $247 million from $486 in the prior-year quarter.
Margaret Taylor, vice president and senior credit officer for Moody’s corporate finance group, estimated that Penney’s would burn about $250 million of free cash flow this year, with that number rising to more than $425 million in a “downside” scenario and falling to breakeven under an “optimistic” model.
She said that cash and cash equivalents of $1.17 billion at the end of the first quarter and the new facilities “provide it with adequate liquidity that can support the potential range of free cash flow burn.”
However, “a very meaningful improvement” in gross margin will be necessary for Penney to achieve operating profit. In the first quarter, gross margin rose to 33.1 percent of sales from 30.8 percent in the 2013 period.
Penney’s nearest debt maturity comes next year when $200 million in 6.875 percent notes come due.
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